Alexion Remains Neutral

We are maintaining our Neutral recommendation on Alexion Pharmaceuticals (ALXN) with a target price of $61.

Alexion Pharmaceuticals, based in Cheshire, Connecticut, is a biopharmaceutical company formed in 1992. The company focuses on a strong scientific and product development base for the development of novel antibody therapeutics that target the treatment of patients with a wide array of severe disease states, including autoimmune and cardiovascular disorders, inflammation and cancer.

The company delivered a strong performance in the second quarter of 2010. Alexion Pharmaceuticals’ second quarter earnings (excluding special items but including stock-based compensation) of 31 cents per share were well above the year-ago earnings of 18 cents. On a reported basis, the company earned 39 cents per share in the reported quarter as against 26 cents in the year-ago quarter. The Zacks Consensus Estimate for the second quarter of 2010 was 30 cents per share. Earnings in the quarter benefited from an uptake in revenues.

Soliris is the growth driver at Alexion. Soliris was approved by the US Food and Drug Administration and the European Commission in 2007 for the treatment of paroxysmal nocturnal hemoglobinuria (PNH), a rare genetic blood disorder. The drugis also approved in many other countries.

Soliris has been granted orphan drug designation for the treatment of PNH which means Alexion has market exclusivity for the drug for seven years in the US and ten years in Europe. We note that strong Soliris sales have helped the company achieve profitability since the second quarter of 2008.

Soliris is also being developed for other indications. These include atypical hemolytic uremic syndrome, a rare disorder that can lead to kidney failure or death; dense deposit disease, a rare and severe kidney disorder; myasthenia gravis, a rare and severe neuromuscular disorder; multifocal motor neuropathy, a rare and severe autoimmune disorder. Currently, there are no approved treatments for any of these disorders and the successful development of Soliris for one or more of these indications will boost the top line at Alexion.

However, we remain concerned about the company’s dependence on a single product for growth. Given the absence of any late-stage pipeline candidate, we are concerned about the company’s long-term growth prospects.

We believe that Alexion’s current valuation adequately reflects its fairly balanced risk/reward profile. We see limited upside from current levels.

We have a Zacks #3 Rank (short-term Hold recommendation) on Alexion’s shares. This implies that Alexion is expected to perform in line with the broader US equity market over the next 1 – 3 months. We are Neutral on the stock in the long-term, which indicates that Incyte’s shares are expected to replicate its short-term performance, but over 6+ months. Consequently, we advise investors to retain the stock over the time-period.

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